19. The Commission's observation that excise
rates on fuel vary between Member States (see Box 1 above) and
that such variations prompt tank tourism is uncontroversial. What
is less clear is whether such variations lead to a "distortion
of competition in the internal market", as the Commission
claims. The Committee asked: in which specific market activity
is competition distorted by these variations, to whose advantage
does this distortion work, to whose disadvantage, and to what
extent?

20. A substantial body of work has been established
on these questions by a long-standing research programme conducted
by the European Conference of Ministers of Transport (ECMT). This
research has been endorsed by the Commission, as well as the Transport
Ministers of the member-countries of the ECMT, including all 15
EU Member States. The work is set out in two reports by the ECMT;[8]
it was summarised in evidence submitted to the Committee by Professor
McKinnon[9]
and by the ECMT Secretariat: "The work includes a detailed
quantitative analysis of the impact on competition between the
haulage industries of member countries and finds no evidence that
the existing differences in rates of fuel taxation distort competition
in the haulage market." (p 21)

21. There are two distinct sets of road haulage
markets in relation to which tax differences and their potential
to distort competition need to be considered. One is the international
or cross-border road haulage market within the EU and the competition
between flag-carriers from the various Member States in this market.
The other is the domestic road haulage market of each of the Member
States and the competition between local and foreign hauliers
within each domestic market. These two sets of road haulage markets
are considered in turn below.

International road haulage

22. In regard to international road haulage,
the ECMT evidence suggests that, taking into account the full
range of transport taxes and charges, the marginal effective tax
rates (METRs) on flag-carriers from the various EU Member States
were remarkably similar for the various typical cross-border haulage
trips. The evidence on one such typical scenarioManchester
to Milanis reproduced in Box 2; a fuller range of evidence
is available in the ECMT Reports of 2000 and 2003.

23. Thus, whereas each flag-carrier may be disadvantaged
by a higher-than-average rate on one or more particular tax (e.g.
fuel duty, insurance tax, capital and labour taxes, et cetera),
the net result is that "in competing for international
hauls differences in taxation do not confer a significant
competitive advantage to any of the countries examined."[
10]

24. The Commission's Explanatory Memorandum does
not refer to the ECMT research on this point; nor does it cite
any contrary evidence. In contrast, the UK Government "strongly
support" the ECMT findings. According to the Economic Secretary
to the Treasury, the Commission "ought to be aware of that
evidence [ ] it shoots a hole through one of the main justifications
that the Commission had for proposing the Directive in the first
place." (QQ 46-47)

Box 2

Domestic road haulage

25. In regard to domestic road haulage, there
is a more significant variation in the rates of taxation faced
by local and foreign operators within a given Member State. For
example, UK flag-carriers face a higher METR in the Netherlands
than do local Dutch operators; French flag-carriers face a lower
METR in the UK than do local UK operators.[11]
The evidence from the major UK industry associationsthe
Freight Transport Association (FTA) and the Road Haulage Association
(RHA)on the relative disadvantage faced by UK operators
was consistent with the ECMT findings on this point.[12]

26. It does not necessarily follow that this
difference in tax rates had led to a distortion in competition.
Witnesses noted two points in this regard. First, there is considerable,
if not conclusive, evidence that variations in pre-tax costs (including
the pre-tax cost of fuel but importantly capital and labour costs)
tend to offset variations in taxes so that "total operating
costs are fairly similar, particularly between the UK and its
European neighbours" (p 29). For example, a study conducted
for the Irish Government in 1999 showed little variation in total
costs in the UK, Ireland, the Netherlands and Germany (see Box
3).

27. As mentioned, this evidence is not conclusive; and pre-tax
costs do change from year to year. The most recent data from the
FTA suggested that, as at October 2002, the total cost of French
and Dutch domestic road transport remained 14% and 9% respectively
below the level of the UKthough the FTA also recognised
that these variations were far less than the variation in the
post-tax cost of fuel which was, in the case of both France and
the Netherlands, 33% below the level of the UK (pp 24-25).Box 3

28. The second and more conclusive point is that
these variations have not conferred any significant competitive
advantage or disadvantage to any EU country in the only relevant
test: a significant increase in cabotage penetration into another's
market, or a significant loss of the domestic market to foreign
operators. According to the Commission, cabotage penetration rates
were only 0.2% (measured in tonne kms) in EU Member States in
1998.[13]

29. The Government estimated that cabotage represented
only 0.06% of the UK domestic road freight market in 2000 (p 7).
Professor McKinnon noted that the Road Haulage Association disputed
the accuracy of this figure. But he pointed out that even if the
Government under-estimated the level of cabotage by a factor of
ten, foreign operators would still account for less than 1% of
the British road haulage market. "For the vast majority of
British hauliers engaged solely in domestic haulage international
variations in taxes had, therefore, little bearing on trading
conditions."[14]

30. Citing the evidence both on the full range
of costs and on the low level of cabotage, the Government emphatically
rejected the Commission's "postulated" view that "differences
in diesel tax rates lead to material distortions between hauliers
based in different Member States" (p 7).

Cross-Channel trade

31. Both the FTA and the RHA drew attention to
the loss of market share by UK operators in the cross-Channel
road haulage trade: from a circa 50/50 split with foreign
operators in 1996 to a circa 30/70 split in 2001 (pp 39-41).
The industry pointed out that this fall followed the period of
above-inflation annual increases in UK fuel duty. In response
to this concern, the Committee asked: if current marginal effective
tax rates (METRs) are more or less aligned (see paragraphs 22-23
above), what does this mean for the future prospects of UK operators?

32. The loss in market share by UK operators has not been 'straight
line', but a rise and fall from a circa 40/60 split in
1986 to a circa 50/50 split in 1996 to a circa 30/70
split in 2001 (see Box 4).

Box 4

33. The FTA is at one with the ECMT in considering
that the underlying explanation lay in the movement of the exchange
rate between those within and those outside the eurozone. The
extraordinary appreciation of sterling against the ecu/euro since
1996 (see Box 5) made imports to the UK relatively cheaper, as
well as making it relatively cheaper for non-UK firms to transport
these imports (p 27).[
15] The correction in the
exchange rate now underway should, therefore, help to restore the
market share of UK operators to the circa 40/60 split of
the mid-1980sif not the circa 50/50 split of 1996 when
sterling was at its trough.Box 5

34 In contrast, the RHA cited modelling work
by the Centre for Economics and Business Research (CEBR) to argue
that the increase in UK fuel duty was a much more significant
factor in the loss of market share than the appreciation of sterling
(p 40). If the CEBR were rightand considering the evidence
cited above (paragraphs 20, 22-23) that the METRs on international
trips are now more or less alignedthis would suggest that
the "right" market share for UK operators was less
than the circa 40/60 split suggested above.

The need for minimum rates

35 The body of analysis and evidence established
by the ECMT and cited above (paragraph 20) was based on the actual
tax rates prevalent in the present Member States and thus presupposes
the existence of minimum rates of excise duty on fuel.
On this basis, the ECMT was able to conclude that "market
forces"in the form of the right to tank tourism"tend
to limit the divergence of tax structures and levels between neighbours
in an open economy" and "imply no need for maximum rates
of tax" (p 21).[16]

36 At the same time, by acting as a disincentive
to governments to raise the level of fuel duty, the right to tank
tourism reduces the need for operators to exercise this right.
Hence, the problem of tank tourism is, at present, limited in
scale, although the precise extent of the problem is not known.
Commissioner Bolkestein pointed to the case of Luxembourg with
its relatively low excise rate on fuel253/1000 litresand
remarkably high fuel consumption per head of resident population,
which is 6 times higher than in Denmark and almost 9 times higher
than in Germany (Q1). But the example serves, among other things,
to imply the limited scale of the problem: Luxembourg represents
1% of the population of the EU.

37 Nonetheless, the case of Luxembourg highlights
the need for appropriate minimum rates of fuel dutyespecially
in the context of EU enlargement. Without a floor, some Member
States might set off a 'race to the bottom', whereas others would
seek to protect higher rates for environmental and other reasons.
The pressures on the structures and levels of tax in such a scenario
could generate significant distortions to competition. The requirement
for reasonable minimum ratesrepresented by the increase
in minimum rates via the Energy Tax Directiveshould
serve to avoid this possibility.

Other possible distortions of competition

38 The analysis above has focused on the complaint
of distortions to competition in the international and domestic
road haulage markets: quantitatively, these are the markets that
matter most in the debate on fuel taxation. There is, however,
a separate complaint of distortions to competition in the fuel
retailing market caused by tank tourism and smuggling. For example,
there is a well-documented problem of smuggling fuel across the
border between Northern Ireland and the Irish Republic.[17]
The Retail Motor Industry Federation said that the UK Government
needed to revisit the issues raised in this complaint (p 35).
But the Committee did not receive any suggestion that such issues
need to be addressed by EU wide-harmonisation of excise duty rates.
Hence, this aspect of competition has not been considered further
in this report.

39 As stated in paragraph 10 above, the Commission's
case for the second part of its proposalestablishing a
common minimum rate for non-commercial diesel and petrolis
based on environmental grounds, and we discuss it below under
that heading (see paragraphs 50-74). But we note here evidence
from the FTA that suggests that the requisite de-coupling of "commercial"
from "non-commercial" fuel could create a new distortion
to competition in the domestic road haulage market: no less than
44% of the goods vehicles in the UK (190,000 out of 430,000) would
fall into the "non-commercial" category and would consequently
be burdened with a higher rate of duty.

9
Memorandum by Professor Alan McKinnon, Logistics Research Centre,
Heriot-Watt University, Edinburgh (pp 29-31), and two supporting
papers, "Haulier than Thou: An Assessment of the Road Haulage
Industry's Grievances", Public Service Review, October,
2001, and Factors Affecting Competitiveness in the European
Road Haulage Market, report prepared for the European Conference
Ministers of Transport, January 2003 (and incorporated into Efficient
Transport Taxes and Charges 2003, op. cit.). Back

16
The main exception to this rule is the geographical barrier of
the Channel, which protects the relatively high rates of duty
in the UK. But, as shown above (paragraph 26 and Box 3), this
is largely offset by lower levels of pre-tax costs, including
the pre-tax cost of fuel. Back

17
cf. National Audit Office report HM Customs and Excise: The
Misuse and Smuggling of Hydrocarbon Oils Report by the Comptroller
and Auditor General (HC 614, Sessions 2001-02, 15 February 2002).
See also two reports by the House of Commons Northern Ireland
Affairs Committee: The Impact in Northern Ireland of Cross-Border
Road Fuel Price Differentials (Third Report of Session 1998-99,
HC 334); and The Impact in Northern Ireland of Cross-Border
Road Fuel Price Differentials: Three Years On (First Report
of Session 2002-03, 20 November 2002, HC 105-I). Back